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Construction outlook: More cranes in the sky, but labor shortages and rising costs await, too

Leopardo recently completed a 128,000-square-foot phased renovation and expansion of Grubhub’s Chicago headquarters in the Burnham Center at 111 W. Washington St. in Chicago.

When Paul Laird looks at the Midwest markets he serves as vice president and Midwest regional manager for United Construction Company, he sees a busy future. Construction crews are busy across the Midwest today, building spec industrial facilities, downtown apartment towers and new office buildings.

When Paul Laird looks at the Midwest markets he serves as vice president and Midwest regional manager for United Construction Company, he sees a busy future. Construction crews are busy across the Midwest today, building spec industrial facilities, downtown apartment towers and new office buildings.

And Laird doesn’t expect the pace of new construction to slow anytime soon, thanks to a steady national economy and an equally steady demand for new urban apartment buildings and modern warehouses and distribution centers.

“Our crystal ball doesn’t go out into 2018, but we don’t see anything right now that should slow the pace of construction activity,” Laird said. “The construction industry tends to lag behind the rest of the economy. It stops slower than the rest of the economy. And it usually starts back up slower. There is nothing that would indicate that 2018 would be a down year when it comes to construction.”

Spec building on the rise 

Construction activity is solid, or at least steady, across the major commercial sectors. But Laird said that the industrial market is especially strong today.

Much of the demand for new warehouse and distribution facilities is being driven by e-commerce users, Laird said.

This include a rising demand for spec industrial facilities. And these modern buildings need certain features that were once considered high-end but are now becoming requirements, everything from plentiful truck parking to 36-foot ceiling heights to LED lighting.

“Developers are starting to change their standards,” Laird said. “They are using LED lighting as a marketing tool for possible tenants. We are putting LED lighting in more buildings upfront now. Then there are the increasing ceiling heights. A lot of the amenities that we are putting into industrial buildings today are being driven by the needs of e-commerce clients.”

There’s another commercial sector that is keeping construction crews busy: seniors housing.

There’s an obvious reason for this: The country’s population continues to age. And today’s seniors – and their families – want assisted-living facilities that are modern, clean and filled with the type of amenities you’d find in a high-end condo or apartment community.

“That market has really picked up,” Laird said. “I don’t have a clear sense of how long a run that market will have. But obviously, there is real demand out there with the aging population. Today, that market is very strong. We feel that it will be strong throughout 2017.”

Mark Yanik, vice president of corporate development and strategic planning with Hoffman Estates, Illinois-based construction firm Leopardo, said that the amount of construction activity today is particularly impressive when you consider the challenges that the industry faces.

Leopardo is active in Illinois and the Chicago area. And both the state of Illinois and city of Chicago face severe budget problems while being plagued by governmental in-fighting. The state of Illinois hasn't even managed to pass a budget.

But this hasn't stopped developers from building throughout the city. That, Yanik says, is a testament to the impressive demand for new construction in this key Midwest market.

"Chicago does have one key advantage: We have a diversified economy," Yanik said. "If you look at a city like Detroit, it is focused more on the rust belt industries. When manufacturing slowed down, they took it hard. Chicago is more diversified. One of the big booms we are seeing now is driven by the tech industry. We are building out warehouse space for ecommerce users. The big boom in the tech industry is hitting Chicago pretty hard."

Yanik is especially excited about the positive impact the tech industry can have in Chicago and other Midwest markets. After all, ecommerce users need distribution centers in the Midwest to ship their products to customers as quickly as possible.

This is making the Midwest, and its major cities, a more important player in the tech industry than in the past.

"If you look historically at the tech industry, it has been really concentrated in a handful of central hubs," Yanik said. "But now a lot of cities not traditionally known for tech are getting attention. Chicago is getting a lot of growth from that. Google is here. GrubHub is here and expanding. A handful of other big tech names are here. That is creating a lot of activity. But the tech companies are creating and leading a lot of growth in other areas, too, such as multifamily and retail."

Meeting the challenges 

Even though construction activity remains high, this doesn’t mean that the industry isn’t facing its own challenges.

For one thing, labor costs continue to rise across the union markets in the Midwest. Laird said that this is a yearly challenge for construction companies, especially those working in markets with strong unions. Labor costs tend to rise each year, after all.

“Those increases are baked in year after year,” Laird said. “We are accustomed to that. There is not great shock factor to that.”

However, there is one source of rising costs that does come with more uncertainty, the cost of materials. Laird said that this year the price of concrete continues to rise. This, of course, will impact the final costs of construction projects.

Laird said that this year the price of a typical spec warehouse project is up about 3 percent to 4 percent from where it stood in 2016.

“That’s not overly significant, but it is a pretty decent increase,” Laird said.

Laird said that the increased price of concrete is offset a bit by the fact that the costs of other materials is holding steady. Laird pointed to steel: The cost of this key material has been relatively flat, preventing an even bigger average increase in the cost of completing a job.

“Most of the metals have been in check,” Laird said. “That’s a big help. It keeps everything in line. If those prices, though, start to trend upward in addition to the costs of concrete we will start to see much more significant increases. Now there are no indications that this is going to happen.”

Yanik said that rising building costs are always weighing on construction-industry pros.

"I can't talk to a client or speak at an event without construction costs coming up," he said. "Construction costs are rising. You can't deny that."

But rising costs aren't the only challenge that construction companies face. It's also getting more challenging for construction companies to find the skilled labor they need on their projects.

Yanik said that when the economy went into its downturn starting in 2008, many construction workers left the building trades. When the construction industry started to rebound in 2012, it faced a problem: Many of the industry's skilled workers had retired during the Great Recession. Others left for different industries.

Add to that the fact that many view the construction industry as a stodgy, conservative business. That makes it less attractive to the young workers that the industry needs, Yanik said.

"Not enough new people are coming into the market," he said.

Yanik said that Leopardo is fighting this trend by doing everything it can to dispel the myth that construction has to be stodgy and boring. He said that the company is following the path of tech companies by building a workplace culture that is attractive to the next generation of laborers, project managers and leaders.

"The lifestyle and the office culture we can create can make a difference," Yanik said. "We invest in opportunities for our employees to learn and develop. Millennials want growth and development opportunities. You can retain them if you give them the opportunity to learn and grow. So we are heavily focused on letting them grow professionally."

In addition to providing plenty of opportunities to rise through the company's ranks, Leopardo officials have also created work environments that are more attractive to younger workers, Yanik said. Leopardo offers free food in its onsite kitchens. It holds social events, such as renting out movie theaters to screen movies for its employees and their families. Masseuses regularly visit both of Leopardo's Chicago-area offices.

"We try to foster a team environment," Yanik said. "We want to be a place that you want to work at."

Yanik says these efforts have paid off, with an increase in the number of fresh-out-of-college or other young workers at Leopardo.